Under the Selling Pressure, Watch for Dip Buying

Stocks careened lower on Thursday

Stocks careened lower on Thursday as selling pressure returned after Wednesday’s rebound rally. Large-caps are now officially in correction territory, and the post-election “Donald Trump rally” looks truly over as a consequence of rising bond yields.

The catalyst for the decline? A weak auction of 30-year Treasury bonds boosted the 10-year yield to 2.83%, which returned to highs not seen since the first week of 2014 … more than four years ago.

The Dow Jones Industrial Average lost 4.2% in a decline of more than 1,032 points, closing below the 24,000 level, the S&P 500 lost 3.8%, the Nasdaq Composite lost 3.9% and the Russell 2000 lost 2.6% in what was a relatively mild pullback in comparison. If there was as silver lining, it was that the CBOE Volatility Index has made a lower high relative to the closing high on Monday — a sign that the fear could be fading somewhat.

Breadth was heavily negative, with NYSE decliners outpacing advancers by a 7.8-to-1 margin while declining volume represented nearly 90% of total volume. There were just 17 new highs to 208 new lows. It was a bloodbath, basically.

Twitter Inc (NYSE:TWTR) was a rare oasis of green in a sea of red, rising 12.1% after reporting its first-ever profitable quarter before the open. Chipotle Mexican Grill, Inc. (NYSE:CMG) lost 10.6% amid ongoing brand troubles after food poisoning scares.

Nvidia Corporation (NASDAQ:NVDA) gained 2% after hours in the wake of a better-than-expected quarterly report with earnings of $1.72 beating estimates of $1.32 on revenues of $2.9 billion vs. $2.67 billion expected.

Conclusion

While stocks are now quite oversold on a technical basis, with CNN’s Fear and Greed Index swinging back to levels that have been associated with bounces in the past, this depends on the bond market calming down. There is fear that risk parity funds — which depend on stocks and bonds being inversely correlated and trading in opposite directions — will be forced to “delever” after suffering one of their worst weeks in history.

Moreover, there is focus on widening spreads in high-yield junk bonds as well. A sign that the contagion that started last Friday with that whiff of wage inflation is spreading and could result in further forced selling.

Offsetting this is the fact that higher interest rates are actually a good thing for parts of the economy (like how higher oil prices helped the energy sector and overall S&P 500 earnings). Specifically, financials are set to benefit from higher net interest margins.

If a turnaround is going to develop here, watch bank stocks and big-tech names like Amazon.com, Inc. (NASDAQ:AMZN) for dip buying.